Volume Profile

Definition

Volume Profile is an advanced charting study that displays trading activity over a specified time period at specified price levels. The study (accounting for user defined parameters such as number of rows and time period) plots a histogram on the chart meant to reveal dominant and/or significant price levels based on volume. Essentially, Volume Profile takes the total volume traded at a specific price level during the specified time period and divides the total volume into either buy volume or sell volume and then makes that information easily visible to the trader.

Typical levels of significance

  • Point of Control (POC) – The price level for the time period with the highest traded volume.
  • Profile High – The highest reached price level during the specified time period.
  • Profile Low – The lowest reached price level during the specified time period.
  • Value Area (VA) – The range of price levels in which a specified percentage of all volume was traded during the time period. Typically, this percentage is set to 70% however it is up to the trader’s discretion.
  • Value Area High (VAH) – The highest price level within the value area.
  • Value Area Low (VAL)– The lowest price level within the value area.

Calculation

How to Calculate Value Area (VA)

  1. Determine the total volume traded in the profile (total buys and sells).
  2. Take the number of total buys and sells and multiply it by .7 to determine what number is 70 percent of the total buys and sells. (70% is a typical example however any percentage can be used by the trader).
  3. Start at the POC (The row in the profile with the greatest total volume) and record its total volume number. The POC will be the first profile row added to the Value Area.
  4. Now look at the two rows above the POC (the initial value area) and add the total volume of both.
  5. Now look at the two rows beneath the POC (the initial value area) and add the total volume of both.
  6. Determine which of the total volume numbers is larger and add it to the total volume number of the POC found in step 3.
  7. Repeat steps 4 and 5 adding the larger of the two numbers to the Value Area.
  8. Once the total volume of your Value Area matches or slightly surpasses the number found in step 2, the Value Area has been determined.
  9. The highest row within the Value Area will be your Value Area High (VAH) and the lowest row within the Value Area will be your Value Area Low (VAL).

Depending on a time resolution of a chart, data from various resolutions can be used in calculations of Volume Profile. When calculating Fixed Range and Visible Range, we alternately try resolutions from 1, 3, 5, 15, 30, 60, 240, 1D, until the number of bars in the time interval, for which VP is calculated, will be less than 5000. For Session Volume the following dependency on a chart resolution is adopted:

Chart resolution

Resolution of bars used for VP calculation

1S, 5S

1S

15S

5S

30S

15S

1 - 15

1

16 - 30

5

31 - 60

10

61 - 120

15

121 - 240

30

241 and more

60

What to look for

Support and Resistance Levels

The first thing that most traders will use volume profile for is identifying basic support and resistance levels. It is important to note that using Volume Profile as an identifier for support and resistance levels is a reactive method. This means that unlike proactive methods (such as trend lines and moving averages) which are based on current price action and analysis to predict future price movements, reactive methods rely on past price movements and volume behavior. Reactive methods can be useful in applying meaning or significance to price levels where the market has already visited. Basic technical analysis has shown that a support level is a price level which will support a price on its way down and a resistance level is a price level which will resist price on its way up. Therefore, one can conclude that a price level near the bottom of the profile which heavily favors the buy side in terms of volume is a good indication of a support level. The opposite is also true. A price level near the top of the profile which heavily favors sell side volume is a good indication of a resistance level.

Volume Nodes

High Volume Nodes (HVN) are peaks in volume at or around a price level. HVN can be seen as an indicator of a period of consolidation. Usually there is a great deal of activity on both the buy and sell side and the market stays at that price level for a great deal of time compared to other levels in the profile. This can imply a “fair value area” for the asset. When price approaches a previous HVN (or fair value area) a sustained period of sideways movement is expected. The market is less likely immediately break through that price.

Low Volume Nodes (LVN) are the opposite. They are valleys (or significant drops) in volume at or around a price level. Low Volume Nodes are usually a result of a breakout rally or a breakdown. During a rally or a breakdown, there will typically be an initial burst of volume and then a significant drop off. The drop off can imply an “unfair value area” for the asset. When price approaches a previous LVN (or unfair value area), the market is much more likely to rally through or bounce off of that price level. Because it is seen as an unfair value area, the market will not spend as much time there compared to some other levels in the profile.

Example strategy

Just like with most other tools or studies, Volume Profile has a number of uses. There are many trading strategies out there using Volume Profile as a key component. Below are the basics of one such strategy which is based on comparing the current day’s opening price to the previous day’s Volume Profile.

  • If the current day opens above the previous day’s value area (but still below the Profile High) look for price to retrace back towards the Point of Control and then proceed to rise (the direction of the day’s open). Therefore during the retracement to the Point of Control, there is a buying opportunity.
  • If the current day opens below the previous day’s value area (but still above the Profile Low) look for price to retrace back towards the Point of Control and then proceed to fall (the direction of the day’s open). Therefore during the retracement to the Point of Control, there is a selling opportunity.
  • If the current day’s opening price is completely outside of the previous day’s profile (above the Profile High or below the Profile Low) this can be seen as a possible runner in the direction of the opening price relative to the previous day’s profile range.

Summary

Volume Profile is an extremely valuable technical analysis tool that is used by traders everywhere. The key to Volume Profile’s continued relevancy is its versatility. It is a charting tool that truly does have a wide array of uses. Unlike many other studies, there is little to no debate about Volume Profile’s usefulness. The data that is provided by Volume Profile is indisputable, leaving it to the trader to find new and creative ways to use it. Even though in its simplest form, it is a great reactive method for discovering traditional support and resistance areas, traders are still coming up with ways to chart the indicator in predicative or proactive ways. Consider the trading strategy example given earlier in the article. Being able to compare a real-time event (the current day’s open) with historical events (the previous day’s volume profile) and make a trading decision based on the relationship is a great example of this.

Inputs

Period (PVP only)

Sets the period for which the indicator builds volume profile, one profile for each new period. The period multiplier is set in the first field, and the period itself, which can take the values "Bar", "Day", "Week" or "Month", is set in the second field.

Sessions (SVP and SVP HD only)

Determines how the SVP indicator will be built when the extended hours display is turned on. If set to "All" (default), the indicator will consider the pre-market, main trading session and post-market as one session. One profile will be built for each trading day and it will include the volume for all transactions, starting from the first pre-market candle and ending with the last post-market candle. This is how the indicator works on extended hours previously. The "Each (pre-market, market, post-market)" option allows you to build a separate volume profile for each part of the trading day session, taking into account only deals made during that period. If the symbol has extended hours with pre-market, main session and post-market, the indicator will build three separate profiles for each trading day. With the dedicated "Pre-market", "Market" and "Post-market" options, the indicator will only build one volume profile per trading day, based on the trades for the specified session period. These settings should be used only on charts with extended hours. If there is no extended hours data on the chart or if the Extended Hours display is turned off, the indicator will not be able to build a volume profile for pre- or post-market. The "Custom" option gives you the opportunity to configure the beginning and end of the period for which the profile will be built. You can also choose a time zone.

Custom session

If a Custom option is selected in the Sessions section, you can configure the session time period. Use the first two drop-down lists to select the start and end time of the period, and the third one to select the time zone.

Volume

Toggles between showing total volume for each row, splitting each row into buys and sells or showing their difference.

Value Area Volume

Sets the range of price levels in which a specified percentage of all volume was traded during the time period (70% by default).

Rows Layout

Number of Rows lets you set a specific number of rows that the indicator will display. The Ticks Per Row setting establishes how many minimum ticks should be in every row.

Row Size

The number of rows to be calculated and shown.

Extend POC Right

Extends the POC line until it crosses any bar.

Extend VAH Right

Extends the VAL line until it crosses any bar.

Extend VAL Right

Extends the VAH line until it crosses any bar.

Extend Right (FRVP only)

The Extend Right parameter allows one to continue building the profile, including all historical candles and all new emerging candles to the right of the second coordinate.

Style

Volume Profile

Toggles the visibility of the indicator.

Values

Toggles the display of the numerical values on the indicator itself (buy/sell or total, depending on the 'Volume' setting in the Inputs).

Width (% of the Box)

Alters the width of the rows.

Placement

Place rows either left or right.

Up Volume

Determines the color as well as opacity for the Up Volume (Buys).

Down Volume

Determines the color as well as opacity for the Down Volume (Sells).

Value Area Up

Determines the color as well as opacity for the Value Area Up.

Value Area Down

Determines the color as well as opacity for the Value Area Down.

VAH

Toggles the visibility of the Value Area High.

VAL

Toggles the visibility of the Value Area Low.

POC

Toggles the visibility of the Point of Control.

Developing POC

Toggles the visibility of the Developing Point of Control, showing you how POC was changing when the market was in session.

Developing VA

Toggles the visibility of the Developing Value Area, showing you how VA was changing when the market was in session.

Histogram Box

Determines the background color as well as opacity for the Volume Profile area.